Necessary prudence or over-caution?

As Local Government Pension Scheme (LGPS) funds prepare to set employer contribution rates from 1 April 2026 for the next three years, emerging results suggest employers are being asked to pay on average 17% of pay compared with Isio’s “low-risk” rate of 6%.

Is this necessary prudence or over-caution?

By Katy Taylor, Director – Public Services at Isio

This is the most important and challenging LGPS actuarial valuation for years, as it raises crucial value for money questions around the best use of resources. Isio calculates that £6bn a year is at stake, money which could potentially be directed towards bridging the funding gaps of local authorities and supporting education, housing and other local services.

Councils, universities, housing associations, multi-academy trusts and other LGPS employers are expected to be asked by their LGPS funds to pay on average around 17%* of pay towards the funding of LGPS pension scheme liabilities whilst Isio calculates that, with an overall LGPS surplus of £87bn**, a rate of 6%*** of pay should be sufficient.

Reflecting on conversations with funds and employers to date, this is sometimes mistaken as a question of whether there is any risk of a fund not providing security of benefits to be paid to LGPS workers in the future – but of course there is always a risk when predicting the future, and that is precisely the key risk that a Defined Benefit (DB) pension scheme needs to manage.

Instead, the key consideration at this valuation is the relative size and balance of this risk versus the health and needs of the employers supporting these liabilities, particularly when there is such a large surplus to access and make use of, as well as employers wanting and needing the money right now.

Prudence Watch

Isio’s LGPS Low‑Risk Index has proven a useful benchmark to inform discussions on levels of surplus during this valuation. Our new Prudence Watch benchmarking approach is also shedding light on the overall prudence included in each employer’s total contribution rate, by considering the cost of new benefits being built up alongside the use of an existing surplus over 20 years.

In line with our approach to looking at the LGPS as a whole, Isio’s Prudence Watch assesses an individual employer’s total contribution rate using a standardised approach, giving each contribution rate a prudence score. This will support transparency and comparability across all funds and employers, to inform discussion and decision making, as we move towards 1 April 2026 and beyond. 

*  expected average employer contribution rates from 1 April 2026 as % of pay based on proposed contributions seen to date

** total LGPS surplus at the valuation date of 31 March 2025 calculated on Isio’s low-risk (gilts) basis

*** average required total employer contribution rate calculated on Isio’s low risk (gilts) basis, spreading the surplus over 30 years